Common Mistakes We See With Church Payroll

Common Mistakes We See With Church Payroll

If you’ve ever experienced payroll errors first-hand, you know the extensive costs and time-consuming efforts that go into correcting them. Even the smallest of payroll slip-ups can snowball into serious, long-term issues and increased expenses, especially if those mistakes continually occur. But when mistakes happen, it’s important to determine what occurred and why, and then identify the root causes so they don’t happen again.

When you’re focused on your ministry, inattention to compliance issues can trigger costly fines, penalties, and lawsuits. Here are some common compliance missteps that churches should avoid:

Failure to account for differences in state or local laws

Many states and locality taxes have different reporting requirements than the federal wage. You must always comply with all applicable state and local requirements, in addition to federal laws.

Misclassification of a nonexempt employee

When the church makes mistakes in worker classification (exempt vs non-exempt), they open themselves up to action under the FLSA for wage and hour violations.  Remember, many states have their own wage requirements and overtime rules. You should also be mindful of federal and state laws for classifying independent contractors versus employees.

Failure to calculate pay correctly

There are many ways to make errors on paychecks, including failure to apply overtime rules, mistakes in paid vs. unpaid leave, housing allowance, health care allowance, Medi-share plans, Social Security allowance, etc.

Missed payroll tax filings and deposits

Payroll tax penalties and fines apply if your church fails to make timely federal deposits. These penalties are quite expensive — up to 15% of the past due amount, depending on how many days late the deposit is made.

Withholding FICA and Medicare taxes on ministers 

Many churches are unaware that section 3121(b)(8)(A) prohibits the church from withholding Social Security and Medicare tax on the wages earned by a minister. It is the responsibility of the minister to pay the self-employment tax on his/her salary and housing allowance unless he/she has applied for self-employment tax exemption.

Not recording salary reduction 403b contributions

Employee’s 403b contributions reported in box 12 with a code E. The contribution amount is subtracted from box 1 of the W-2.

Not Including Gift Cards and Other Cash Equivalents in Employee Income


Employee prizes like gift cards and awards are necessary to report with income if they exceed a cash equivalent of $75 or more. For example, if an employee wins a $300 Visa gift card, that is enough to be reported with employee income. These are taxable wages, and never reporting items like this can result in some pressure from the IRS.

This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.